Steps Ahead

How can the FX industry reap the benefits of smart data?

Jack Jeffery
Chairman, Mosaic Smart Data

Operations in the financial industry have changed immensely over the past two decades since the advent of electronic trading. The multitude of electronic platforms that can now handle the volume of transactions in FX has opened up the market, compared to the two options market participants had 20 years ago – EBS and Reuters.

While this may be beneficial in offering competition, it does present challenges. The multiplicity of trading venues, the heterogeneity of technological interfaces and the variety of data protocols used across these platforms makes it difficult for FX participants to monitor market information and assess their risks in real time.

Idiosyncrasies of FX

Consolidating relevant data on all trades by counterparties across voice transactions, interdealer electronic platforms, as well as single and multi-dealer electronic communication networks (ECNs), is a daunting task. The differing frequencies and formats combined with the sheer volume of transactions, in this most liquid of markets, make the whole industry extremely complex.

It is impossible for every market participant, from the sell-side and buy-side to trading venues and infrastructure providers, to digest the flow of data to inform their decisions in real-time if they are unable to analyse the inputs in bulk. Does a voice trader need to follow the tick-by-tick evolution of FX rates at high frequency? Not necessarily. Does the high-frequency order flow contain information which may be relevant for the trader’s execution strategy and risk analysis? Probably yes, but this information requires the raw data to be processed.

The need for ‘smart data’

The gathering of raw or ‘big data’ on its own is not enough. What market participants now benefit from is ‘smart data’. This is data that has been normalised – i.e. standardised – and presented in a unified format. It’s a logical step that consistent transaction messaging language leads to more streamlined operations.

Artificial Intelligence (AI) can quickly identify erroneous or incomplete data and transform only the clean and enriched inputs into smart data that can be used across any part of an institution’s trading operations.

To add further capabilities, advancements in machine learning enables the ability to spot ‘normal’ activities in data sets as well as ‘abnormal’ behaviour; this not only provides a deeper understanding of any particular market, but can also guide traders to potential opportunities and action.

Commentators may refer to ‘data as the new oil’, but we should remember that cars and airplanes don’t run on crude oil, but on fuels derived from oil through a sophisticated, multi-stage refinement procedure. It is the enrichment process that turns ‘big data’ into ‘smart data’.

Institutions aiming to create their own data transformation platform that can operate across all counterparty transactions may find that it is unfeasible to harmonise different protocols and too costly to produce their own in-house solution.

In an industry where time to market is imperative, the ability to license an already-available secure platform is a prudent option. Neutrality of a third-party supplier will engender trust in the data, can stimulate trading on the platform and link multi-asset participants to one source of liquidity. This will also allow for transparent benchmarking of prices and comparison of market share.

Progress in FX not only requires a platform that can handle the huge volume of complex trades, but one that is as intuitive as a quant providing analysis and context 24/7. The disparate nature of multi-party protocols has traditionally been an overwhelming challenge for many participants to overcome

Why should the FX market care?

Developments in technology means that data can now be processed with practically zero latency. In J.P. Morgan’s latest e-trading survey,[1] 82 per cent of respondents said that access to real-time data was the most important factor within the overall sphere of data services.

But having access to data is only part of the equation. It is the marriage of technology and human expertise that precipitates success. The ability to gain insights through smart data in real-time, with guided options, enables the FX trader to make a judgement call on how to proceed. Additionally, the availability to access a wide variety of reports offers a current view of the wider financial ecosystem.

Being better informed allows an institution to better service and provide tailored solutions for its clients, and ultimately, to gain a competitive edge. The ability to provide deeper insights drives customer loyalty and consequently leads to a more consistent, stable and profitable business.

With advances in technology, cutting-edge platforms are now able to solve this issue with zero latency. FX participants can now take advantage of this technology and thereby improve their performance, optimise client relationships, and maximise profitability.

[1] JP Morgan: e-Trading 2020 Survey Macro.

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Mosaic Smart Data is transforming the financial industry, empowering market participants with analytics tools to find and retain a competitive edge. In an increasingly data-driven world, we provide finance professionals with the ability to quickly harness available information to drive the right business decisions.

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